Chapter 9: Limited Decision-Making in Perfect Competition
Two methods enable you to maximize total profit. First, you can maximize total profit by using total revenue and total cost. Alternatively, you can use marginal revenue and marginal cost to maximize profit.
Calculating economic profit After you determine the profit-maximizing quantity of output, you want to determine how much profit you make. Using total revenue and total cost, your total profit is easily calculated by subtracting total revenue from total cost. However, determining the profit-maximizing quantity of output by using marginal revenue and marginal cost doesn’t directly provide you with a measure of total profit. In this situation, total profit is determined by first calculating your profit per unit of output and then multiplying that amount by the profit-maximizing quantity of output. Profit per unit equals price minus average total cost, or
Total profit is determined by multiplying profit per unit by the quantity of output produced
In Figure 9-2, profit per unit is represented by the double-headed arrow between price and average total cost at the output level q0. The total revenue and total cost equations from previous examples in this chapter are
and
Given these equations, you determine the profit-maximizing quantity is 700 units of the good given the market-determined price of $80. In order to determine the profit per unit and total profit, you take the following steps:
1. Determine the average total cost equation.
Average total cost equals total cost divided by the quantity of output.
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